During the first procurement technology breakout session after lunch yesterday, Pierre Mitchell talked about commodity management. He opened by noting the 30th anniversary of Kraljic’s seminal category segmentation HBR paper (“Purchasing must become supply management” Peter Kraljic, HBR, Sep/Oct ’83). It’s well worth reading if you haven’t already, as the paper still reads as fresh and relevant as it probably did back then.

Looking at the supply impact – the risk and reward – is a good starting point. Note that commodities aren’t necessarily simple just because they look that way. Many aspects make buying even a bar of metal non-trivial:

Pricing volatilities

Volume volatilities

Supply capacity constraints

Geopolitical volatility

Supply chain lead/lag

Ergo, even if it is a commodity, it can be a strategic buy!

Pierre continued with examples around how the procurement organization needs early visibility into upstream price and other changes, as well as client contract terms that impact profitability – aligning with the customer. Enabling true target-costing is critical.

Pierre stressed the importance of internal alignment around metrics – whether anyone is held to metrics that are siloed off and not shared or otherwise collaborated on. If that is the case, the company would not be operating at its optimal level.

Total cost of ownership modeling is another area to look at. This requires going back to the drawing board, perhaps reverse-engineering some parts. Pierre brought up looking at category-focused providers for insights – input cost models, forecasts, and other intelligence. Resilinc is one firm mentioned as a good example in High Tech.

Lessons

Commodity doesn’t mean simple.

Multi-tier from customer to end commodity

Cross-functional problem

Massive opportunity – early days – job security!

In closing, Jason called direct spend “the next frontier of procurement.”